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Australia Banks Surge as Misconduct Report Delivers `Soft' Blow

(Bloomberg) -- Australia bank shares surged after an inquiry into decades of wrongdoing stopped short of demanding a structural overhaul of the scandal-plagued industry or tighter lending rules that threatened to crunch profits.

While banks will face a tougher future with regulators empowered to crack down on wrongdoers, the 76 recommendations in the Royal Commission’s final report were widely seen as a reprieve for the banks, which had been battered as the probe unearthed a string of scandals from charging fees for no service and pushing people into poorly-performing products to meet bonus targets.

Commonwealth Bank of Australia, the nation’s largest lender whose many scandals helped give impetus to the inquiry, jumped as much as 5.1 percent in early trading, on track for it’s biggest one-day gain in almost nine years. Westpac Banking Corp. surged as much as 8.1 percent and Australia & New Zealand Banking Group Ltd. rose as much as 6.5 percent.

National Australia Bank Ltd., whose top executives were lashed by Commissioner Kenneth Hayne for failing to accept criticism or the gravity of its wrongdoing, gained 5.5 percent.

“The soft recommendations of the Royal Commission final report is a clear win for the banks,” UBS Group AG analysts led by Jonathan Mott wrote in a note. “We do not believe that any of the 76 recommendations by themselves will have a material financial impact on the banks.”

In his 1,000-page report, Hayne lambasted senior bank executives, said the fees-for-no service scandals could lead to criminal charges, and urged the securities regulator to get tough and start considering prosecution rather than negotiation as its first step.

But he steered clear of recommending financial firms be forced to split off financial advice and wealth management units to avoid the conflicts of interest that were at the heart of much of the wrongdoing.

“Enforced separation of product and advice would be a very large step to take,’’ Hayne wrote. “It would be both costly and disruptive. I am not persuaded that it is necessary to mandate structural separation between products and advice.’’

That’s a boon for wealth managers AMP Ltd. and IOOF Holdings Ltd., which suffered some of the biggest reputational and share price damage during the inquiry. Both companies rallied Tuesday, with AMP gaining as much as 11 percent, and IOOF jumping 14 percent.

“The report is not as stringent as people might have expected,” said Eleanor Creagh, Sydney-based Australian market strategist at Saxo Capital Markets. “I don’t think that the Royal Commission did anywhere near enough to cover what’s needed there.”

In another win for banks, no changes will be made to responsible lending laws, such as enforcing closer scrutiny of a borrower’s spending habits. UBS had estimated that a move to full expense verification by banks could reduce maximum borrowing capacity by about 30 percent, creating a further drag on the property market. Prime Minister Scott Morrison had also warned that tighter lending rules could have triggered an economically damaging credit freeze.

The government said it would act on all 76 recommendations, including setting up a new body to discipline errant financial advisers and creating an independent panel to ensure regulators do their job.

It wasn’t all good news for financial firms, with mortgage brokers hit by the abolition of trailing commissions. Shares of Mortgage Choice Ltd. and Australian Finance Group Ltd. both plunged as much as 34 percent.